Wednesday, 31 March 2010

To me, this is probably the most stupid solution that Germany (or any other country) could have come up with. The banks will pay what is effectively an insurance premium, paid into a bailout fund which will be called upon in the event they need financial assistance later. (Unfortunately, in reality it's more likely it will just end up in the Chancellor's tax slush fund and used to pay welfare recipients or something, like all the other taxes. A bailout will still end up really being paid by taxpayers if/when it occcurs.)

So, the banks will be allowed to take risks as before, but now they will have contributed to some limited extent to their bailout fund when it all blows up next time. I tell you this (even if this money is indeed kept somewhere in escrow for the time it is needed), I very much doubt that the "insurance fund" they will have paid into will be anywhere close to big enough to cover the cost of bailing them out -- the lion's share will almost certainly still, in my opinion, be contributed by taxpayers.

Better solutions would have involved curtailment of certain bank activities and/or splitting their commercial and retail banking operations from their proprietary trading (gambling) operations, to reduce the risk of failures or at least to render them no-longer-too-big-to-fail. All this insurance fund will do is partially mitigate the problem, when it will occur. (The government would not require an insurance premium, if its plans somehow were going to credibly remove that risk.) It is like a green light for the banks to enjoy Business As Usual, but with a small insurance premium penalty.

It will probably convince a lot of voters that the banks are getting punished by politicians though, which is convenient...

Thursday, 25 March 2010

There is a broken wheel in British politics. It turns a little something like this...

Labour get voted in for promising the earth to voters and "someone else will be paying". What's not to like, if you can't see past the end of the Labour leader of the time's (very long) nose?

Then they get the banks to print money like sweetie water, and we get an inflationary boom. Weee! Our houses go up by £1000's a month, and everyone's out at the shops spending their equity withdrawl money. Wow! These Labour guys are geniuses aren't they? They're just The Best! Let's keep them in for EVER! The banks are pretty happy with their lot too.

Then... the reality. The interest on the bonds raised to exchange for the banks phoney "money" suddenly consumes most of the annual tax income. Bummer! Booooo! The mathematically inevitable bust comes around again.

Oh, guess who we have to vote in, to clean this mess up AGAIN? Ah yes, the lucky Conservatives who are prepared to tell it like it really is, act, and be nationally despised. Another term or perhaps two of being hated for doing what is required by the scale of the debts acrued, and then... It's Time For Change again!

This is going to continue all the time we have Fractional Reserve Banking, and we have to buy "money" from the BoE at interest. It IS possible, there is a practicable way - we just need to find it pronto. If we don't fix this, that dysfunctional cycle is going to turn forever.

We don't "need" Fractional Reserve Banking, and we certainly don't need the BoE to print our money and take interest. Take these away, put a firm leash on issuance of currency by the Department of Treasury, and this problem just goes away.

Step 1: The Department of the Treasury issue Notes (like Bank of England Notes; can also be in electronic deposit format exactly as Bank of England electronic deposits) to pay off the National debt. Department of Treasury ceases the practise of selling bonds ("UK Gilts") to the Bank of England in exchange for them issuing more Notes and/or electronic deposits. Going forward, all money the UK government requires will be created by its own Department of the Treasury, debt free. A suitable mechanism of restraint on the issuance of new money by the Treasury should be agreed upon and put in place, to credibly anchor future inflation expectations for citizens and international investors while at the same time enabling the economy to expand and to absorb population increases.

Step 2: Increase the reserve ratio private banks are required to maintain from 10% to 100%, thus ending the Fractional Reserve Banking system that enables private banks to create money from thin air by issuing loans.

These two relatively simple steps, which government has the power to enact, would extinguish the national debt, without inflation or deflation, and end the unjust practice of private banks creating money as loans (i.e.: Fractional Reserve Banking). Paying off the national debt would wipe out the £billions of interest payments made by the UK Government to private banks annually, thereby bringing the budget deficit back into balance.

This plan would stabilize the economy and end the boom-bust economic cycles caused by the Fractional Reserve Banking system. It would additionally be impossible for any bank in the UK to fail in future as a result of a run on its deposits.

Wednesday, 24 March 2010

A couple of weeks back, I said I thought it was ludicrous to attempt to blame all of the problems in the world on the terrible winter weather. Specifically the suggestion that retail sales were bad due to the weather. Here

Tuesday, 23 March 2010

At root, the economic and financial problems we are experiencing in the world today are a result of the way we create money currently. We agree to pay the Federal Reserve/Bank of England/European Central Bank/etc — all privately owned corporations, in spite of their deliberately misleading names — a fee ("interest" or "the coupon") every year in return for their "money" that they create out of nothing at our government's request. When the expiration date of that created money comes around (the maturity date of the government bond that it was exchanged for at the time of creation), the money is simply removed from the system and this is what causes the "bust" in our economic cycle ("monetary deflation", followed by resultant consumer/producer price deflation that must follow as surely as night follows day, which in turn is followed by job losses as sure as day follows night).

It is a built-in feature of the money system at the moment that we will have booms (as the money supply is grown, "monetary inflation") and busts (as the money supply shrinks, "monetary deflation"). It is also built into the system that the busts will be in proportion to the level of the boom that precedes them. This should tell you that the current bout of money creation that our Western governments are inducing is indeed stimulating a sizeable "boom" over the last year, but that this boom will be like all others before it that were brought about only as a result of the issuance of more money-from-nothing, there IS going to be a proportionate bust later when the money supply not only is no longer experiencing massive inflation, but it rolls over into the phase where the bonds reach maturity and the money created in return for them is removed from the system. In other words we are pre-programmed to experience monetary deflation and economic bust again after this round of money printing has played out. You can put the dates in your calendar if you like, just ask the Treasury what are the maturity dates of the bonds they issued to get the money from the Central Bank. It is simply inevitable.

You cannot spend your way to prosperity, and you certainly can't do it by spending money that is made up out of nothing and without any constraint on the amount. Gordon Brown will tell you otherwise, hell he is even on record proclaiming that he had actually abolished boom and bust! Pray tell, what is it that he supposedly has done which could possibly do anything of the sort? The man has been for over a decade in charge of the finances of one of the "richest" federations of countries in the world, the United Kingdom, and yet he is an economic illiterate if he truly does believe what he says. He has done nothing in this time but ask the Bank of England to create ever-increasing volumes of money, in exchange for the future of every citizen of the nation. He has been lucky enough up until recently that he had a tail wind from other parts of the global economy, but that tail wind is switching around to come back in our faces currently. He is like a weather-vane that has been sitting facing one way in the wind for so long that it has rusted into place, he is unable to change direction. It is a case of print or die, as far as Mr Brown is concerned. He does not appear to understand that the more money he asks for, the bigger will be the bust that follows.

Over the last year or so the governments of many nations, but none moreso than the UK, have asked the Central Banks to issue massive amounts of this money-from-nothing, in exchange for an unprecedented wall of government bonds that are being issued in order that they can go out and spend the money to "save the world". These bonds are going to transfer an unprecedented amount of the future toil and wealth of each and every taxpayer — plus their children, and grandchildren — via the interest payments that will be made, to the benefit of the shareholders of the Central Banks.

When will this robbery in broad daylight be brought to a stop? We have to stand up and demand a better monetary creation mechanism, one that doesn't involve the payment of compounding interest, before it is too late. The governments of the world all have it within their power to return the ability to create money back where it belongs, their own Treasury department.

There is truly no good reason that they cannot create the money themselves, without charging themselves (and therefore ultimately taxpayers) any interest for doing so, and with no expiration dates. They certainly would need to have a credible mechanism that will prevent over-issuance, but that is a minor detail that could be easily addressed I feel. If Mr Brown really did want to abolish boom and bust, this is exactly what he would do.

Monday, 22 March 2010

Most recently, here. They will also likely have no choice but to leave the Eurozone, so that they can revert to Ye Olde Drachma and then they can devalue it in order to inflate away their existing debts. There is no other mathematically plausible solution, that I can currently see.

Spain, Portugal, Italy, Ireland, maybe even France ultimately, are likely to share a similar fate. All in good time. You can only overspend so much of other people's money, and all of these nations have gone wild promising the earth to their voters over the years. At some point, the party has to stop and the hangover has to be worked through.

In the UK we have made all the same kind of unpayable promises, but at least we have retained monetary and fiscal independance -- praise god that we managed to stall entry into the Eurozone, or we would be neck deep in trouble like Greece right now. I hope you can all see that there is no way we should be shackling ourselves to that kind of quazi-federal system! In fact, if we had joined, it might well be us all over the papers right now rather than Greece.

Our current debts, and future debt obligations, are crushingly heavy - just like all of our socially over-generous friends across Europe (and elsewhere in the world, mentioning no names, cough-USA-cough). But at least we still have the local option of devaluing the Pound to at least gradually dissipate the sting of what is still to come. It will still smart for sure though. A lot. It is unavoidable, whatever Gordon Brown might attempt to have you believe over the coming months.

Friday, 19 March 2010

The UK government have been living in La-La Land, and they continue to do so. We're all going to pay the price in due course, whatever the result of the election, but not until after it's out of the way. Look out second half of 2010 I think.

Updating my previous guess at the short term direction of US$ gold here, I check on the $GOLD chart a moment ago and see a potential head and shoulders, which if it does play out (a break below $1100) could project a decline to around the $1060, perhaps $1030, or so area. A break above $1130 would probably be sufficient to invalidate this pattern I guess.

Gordon must be pissing his pants with excitement, jumping up and down like a kid with a surprise bag of sweets wondering which one to gorge himself on first. I bet Alistair's ear is sore as hell already.

If you or I found that we hadn't quite maxed out our overdraft completely, we might reasonably expect to breathe a sigh of relief and be glad that we were a bit less shackled to the banks than we had thought.

Not Labour though. Oh no, they never saw a Pound they didn't want to spend. They forecast before they would overspend by £14billion in February, but they "only" borrowed £12.4billion! It's like they found £1.6billion in cash down the back of the sofa at 10 Downing Street! And just before a pre-election budget too.... well that's handy dandy, innit?

Philip Hammond, the shadow chief secretary to the Treasury responded by saying the Government borrowed more than the entire Home Office budget in February and was "racking up debt at the astonishing rate of over £300,000 a minute."

I don't know about you, but I wouldn't mind having the opportunity to spend £300,000 of other people's money (yours) every minute. :-\ However, unlike Labour, I wouldn't do that -- I would just be enormously relieved that I hadn't put the whole country quite as far into hock as I had previously imagined.

If I was cynical, I might even think that they had deliberately overbudgetted certain items of expenditure, so that they had the credit approved beyond what was truly expected for the month. It would be pretty handy having this £1.6bn chunk of "spare change" on hand for electioneering purposes. But who could have known there would be an election just now in advance?

Wednesday, 17 March 2010

Martin Armstrong is quite some character. Here he is, unjustly locked in prison and now hidden away in the hole, and even if he will ever be allowed justice and be released his life will be under threat. He is just too smart for some people's liking, if you know what I mean. The parallels with Kondratieff's story are all too clear if you ask me. You can read the disputed Wiki article on Armstrong here if you like, but bring a bag of salt is my advice.

Anyway, with all these things on his mind, still he is able to scribble a rough economic plan on a piece of paper for the governments of the West to stand a hope of rescue for their nations. I'm pretty sure none of them will listen though, and instead will continue with this misguided policy of debt cure by debt expansion. It is horrifying to watch.

Here is the plan scribble from Martin Armstrong, former Chairman of Princeton Economics, and economic genius. Later, after this has been ignored by everyone that could make a difference (and I can assure you, they WILL have seen it) and we suffer the disaster that lays in wait for us ahead, we will be once again informed that "nobody could have foreseen this disaster ahead of time". Yeah, really? You will know this is BS, just like it has been every time you've heard that before.

The Bank of England has been painted into a corner by their own actions.

Restart Quantitative Easing (QE) and the Pound will sell down due to fears of dilution of the currency down the line.

Don't restart QE and the Pound will sell down due to fears the economy will go back into a tailspin, perhaps this time going for a crash and burn.

I have put up charts recently, discussing a possible coming significant fall of the Pound over the medium term (most recently here), and I have also forecast resumption of QE (most recently here). It would appear Charlie Bean at the Bank sees things the same way I do.

This time they're saying if Europe can't offer them a life raft by the end of this month, they'll go a-callin' to the IMF for help instead. They ask for Europe to put down a €30billion "loaded gun on the table", but will be "happy" with only €25billion -- sufficient to tide them over their earlier debts that come due for repayment by the middle of the year.

Unsurprisingly, the Eurocrats are still kicking the tires, trying to find a way of printing up money to give to the Greeks, while at the same time being able to tell their own voters -- and investors looking at whether or not to buy their own government bonds -- that isn't what they're doing.

My money is still on an ECB-sponsored underwriting of the Greek debt auctions for the next few months, by getting the big European banks to buy the bonds, with guarantees from the ECB that they will be repaid in full in the event that Greece has to ultimately default on those loans.

In other words, the ECB would effectively be writing "naked"[1] Credit Default Swap (CDS)[2] derivatives for the banks -- exactly what the european financial regulators are talking lately about banning hedge funds and large international commercial banks (such as Goldman Sachs, JPMorgan, Barclays, HSBC, Deutsche Bank, UBS, etc) from doing.

If they go ahead and do this, and Greece goes on to default, it'll be like someone turned on the money tap at the ECB and went away on a long vacation... Got gold?

[1] "naked" meaning "without being in possession of the asset being insured or sold"[2] a "Credit Default Swap" is an insurance contract where the writer agrees to repay any ultimate financial loss on the insured asset to the holder of the contract, in return for an initial premium payment. These CDS contracts are unregulated instruments that can be freely traded among investors -- generally hedge funds and commercial banks, but they can also be traded by, say, pension fund managers, mutual fund managers, state or municipal government treasuries, anyone really -- if they wish to speculate on the likelihood of a default and to make money accordingly.

Our government just gets more and more akin to the Soviets. In a twisted sleight-of-hand lie to the voting public, we are lead to believe that unemployment has gone down this month. Pretty handy just before an election, eh? ;-)

However, you don't have to be a genius to work out that people who have been unemployed for one year and one day, have not magically converted instead into something "economically inactive", they are still "unemployed".

Not according to the Office for National Statistics (ONS) though. The UK government's very own Ministry of Truth, for anyone who has read George Orwell's 1984. (If you haven't read 1984, you really should -- but to summarise for you, up is down, black is white, I am holding up as many fingers in front of you as I tell you I am, the Ministry of Love will beat you senseless until you agree with it and come to love Big Brother even while his boot is stamping on your face and the faces of everyone you love.)

On the bright side, given a depression is generally expected to run about twenty years or so, it's probably approaching time for it to be over for them at last. Probably they will get out of it by serious inflation through a last desperate burst of printing and debasing the yen, thereby finally scaring people out to the shops to get rid of their money before it's worthless. Perhaps it really is time to be heavily into their stock market, finally..?

Meanwhile, back in the West, we're just getting started doing the exact same things they've been doing in the East all that time. The definition of madness is doing the same thing over and over, expecting different results.

Tuesday, 16 March 2010

For "an effective pay cut" read "the Pound will be devalued and therefore commodities and goods purchased on world markets -- so almost everything then -- will get more expensive, even as you are forced to accept flat wages, or more likely in fact a pay cut".

Meanwhile, public sector unionised workers strike en masse to protest at not getting a good enough pay rise offer. Boo hoo. Where exactly do they think the money is going to come from? The private sector is crippled and tax receipts are accordingly significantly down. It is already impossible for the government to continue paying for all of their staff as it is, without pay rises. The union leadership need to grow themselves a brain between them, either that or they know the situation well enough but are telling lies to their members. There are going to unavoidably be significant public sector job losses, and if staff who will remain are to get pay rises, that simply means there will be even more jobs lost to enable that to be possible. That is the mathematics of the situation. If the unions truly wanted to protect their members jobs, they would explain the issue to them properly and then negotiate viable wage cuts so that people can keep their jobs.

Monday, 15 March 2010

I was a moment ago just doing a regular check-in to see what is going on in the boring world of Foreign Exchange rates (which I find is quickest and easiest at the www.kitco.com website since I am often there looking for news and articles on this sector anyway, but you can get it anywhere you like it's all the same of course). It is boring, but its useful to keep half an eye on I find.

Anyway, to cut a long story short: the Pound just this morning made the kind of move normally associated with the volatile currencies of banana republic nations -- it is down 1% so far today, and as you can see from the time of this blog entry it's only lunchtime. New York hasn't even logged on yet.

Compare that move in the list above to that for, say, Brazilian Real, Russian Ruble, or South African Rand. One percent doesn't sound like much, but in the world of Forex, especially for one of the major currencies like the Pound, that is a serious move in such a short window of time. If that happened every day you would sure feel it at the shops and the petrol station!

Today I read a Telegraph article that presents the view of Kornelius Purps, Unicredit's fixed income director and a leading analyst in Germany, regarding the outlook for the UK government bond ("Gilt") market, and by extention the value of the Pound. His view matches mine exactly: the UK government will have no choice but to resume Quantitative Easing this year, because nobody else has been buying those Gilts last year and it is unlikely many are going to step up to the plate now, and regarding the Pound he is forecasting £1 = $1.31 during 2010.

Fractional Reserve Banking by it's very nature is money creation. The tightening of the money supply recently means that in order for bankers to continue their lifestyles and business practices they need to turn to the Government and consumer to find that missing money. Any use oof the TARP funds directly will have a paper trail. They also know that in the future, in order to keep their lifestyles, they need nothing to change.So, there will never be enough money ever again within the banking system in order to keep 15-25% of reserves. If the people really wish to make difference, then a clear signal needs to go out to the banks, and we can all make that signal very clear and very easily.We run on the banks.I would propose that in the week running up to September 1st, every customer with a bank account (checking or business) makes a withdrawal, in cash, of as much as they can afford. After September 1st they can just pay the cash back in, with a loss of 1 weeks laughable interest.This will give the banks 6 months to make amends themselves and change, in fact, we may never need to do anything, but it will put the power back to the people. If the banks refuse to change, then we will do it again and again until they get the message.The only way to make a bank listen, is to run on it.Week up to September 1st - spread the word.

Now, I'm not suggesting for a minute that I advocate this action (although I do always advocate keeping at least a couple of month's expenses at home in cash, just in case). However, it wouldn't require everyone at any one bank to take part, only a significant minority who could take out even say 1/10th of the cash that bank had available at the time and it would immediately lock up the bank's operations (see also my earlier post Our world balances on a sea of debt). Think back to Northern Rock for example, that bank run started with a small minority of deposits getting called initially but it very quickly expanded into queues or ordinary people queuing down the street to get their money out. Now imagine queues outside every bank. A scary mental image...

Check out this linked article (a paragraph extract I have chosen from it is below) if you would like an overview of what the root cause of the financial malaise is, and always is, or you simply would like to understand how money is created (and destroyed), and by whom.

Likewise with the banks – lend ten times more money than you possess and when the economy grows – or at least pretends to grow – Porsches galore, but when the lack of growth is exposed it requires only 11% of the loans on your books (in value terms) to be bad and you are bust. The truth is not that these institutions have suddenly become insolvent therefore, but that they were never really solvent in the first place since the assumptions on which they were founded could not apply in the real world. Simple false-accounting has meant that by rolling over their debts they have been able to keep them on their books as ‘assets’ rather than losses and forestall the evil hour.

Tuesday, 9 March 2010

NOT. This is a pathetic line that is wheeled out lately for everything.

The weather isn't stopping people from shopping. I would argue that people go to the shopping mall more when the weather is bad, because they can't really go and walk in the forest, or take the kids to the play-park, or anything else they might ordinarily do outside. The weather wasn't bad enough to physically prevent people leaving their homes. I have been to the mall and seen plenty of people milling around during the bad weather (although you may also have noticed that the lines at the pay desks were not long, and most people walking around are not exactly dragging a heavy load of carrier bags choc-ful-o-goodies around with them). Shopping is still the national passtime, but buying is no longer such a big part of the experience as before.

The weather isn't stopping people from buying houses. They just aren't because of the economic circumstances that surround them. Stop looking for some outside factor that you can blame it on, people simply no longer believe houses are going to make them rich, and nor do banks which is why they have been rationing mortgage credit.

The weather isn't stopping our country's exports. To say that exporters are hampered because they are unable to get their goods to port is ludicrous. If there is a trade deficit, that means that the imports are getting from the ports to consumers, so how come the trucks can't run in the opposite direction on the same roads? Is the snow and ice only on one side of all those roads then? It's simply preposterous.

The reasons we have a trade deficit are twofold: firstly we no longer make anything for export that people in other countries wish to purchase; secondly our currency is being intentionally devalued by our government, which is having the effect that everything we purchase from abroad, which are almost entirely priced in dollars or euros, is automatically that much more expensive when paid for with Pounds. It's very very simple isn't it?

Devaluing Sterling is the very worst solution to the problem of stimulating our moribund economy, but it is what is being done anyway. The truth behind the desire of our government to devalue the Pound is not that it believes this will stimulate our economy by increasing exports. Far from it. The reason they are doing this is because they wish to reduce the real cost of the massive debts they are racking up, via the magic elixir of monetary inflation. The ultimate stealth tax. This is again a great theory in Academicland, but in the real world investors will only buy those government bonds as long as they don't think they will be repaid with money that is worth less in future. Which they do because they are not stupid. The government have for the last year sold their bonds almost exclusively to the Bank of England, who have bought them with freshly-created money (Quantitative Easing), because real investors do not want them at the rate of interest that is on offer -- it is not worth the risk involved.

If our government does not cease this money printing and debt monetisation rapidly, and stop trying to rack up more and more crushing taxpayer debts, we are headed for a major disaster.

You'd better hope that Labour are voted out at this election, because bond investors are not going to like a Labour win.

Friday, 5 March 2010

The BBC today has an article discussing the Reform think tank's tax overhaul proposals. The summary is: extend VAT onto all items, including food, that are currently exempt, and also remove tax on incomes over £105,000 per year.

Here is the paragraph from it that tells me they are simply self-serving fascists, from the end of the article:

Households with incomes of over £17,000 would, on average, see a tax increase due to the broadening of VAT and, for higher rate taxpayers, replacement of personal allowances with a zero rate threshold. Individuals earning more than £105,000 would see a tax reduction.

To put that another way: increase the taxes on the poor and middle class, reduce the taxes of the rich. Don't forget that the rich spend a MUCH smaller proportion of their income on food than the poor, so increasing the tax on eating is hardly going to be an initiative that has a balanced effect on everyone now, is it? Add to that injustice the notion that the more you earn over £105K per year, the more income you are going to pay zero tax on. Wow, that's a neat bit of equitable taxation right there, eh? A real Robin Hood plan.

You can also read the Reform paper itself, direct from their website, here. While you're on the site, check out their staff — and particularly the consultants — lists in the About section. I'm sure a couple of them genuinely are on the side of the man on the street. Their main About page makes much of them being non-party, but these kind of wolf-in-sheep's-clothing attacks for the benefit of the rich when you look at the detail are the classic left wing fascist approach. Listen to what I say we will do, but please ignore the details that explain the effect will be the opposite.

The government of the UK will tell you that printing money and devaluing the Pound by 25% in 2009 was a good thing for everyone in Britain, because it helped our exports and therefore brought money into the country. I begged to differ all along, and here is a chart from Eurostat (via a New York Times article here) that illustrates to you how that was indeed the case; we had the biggest trade deficit among all of the countries listed:

In the immortal words of our illustrious leader "it was the right thing to do". What a crock. What a complete idiot. Who voted for this guy? (Yes, I *do* know that nobody did, it was a rhetorical question...)

Thursday, 4 March 2010

Apparently, a Greek government bond issue taking place today was a rip-roaring runaway success. There were not enough bonds offered to satisfy the rampant demand for them, which is something of a turnaround from recent sentiment. Good for the Greeks; they get to fight another day!

There is still a wall of Euros they need very shortly to pay off previous debts that are about to come due though, and they will need the markets on their side in order to be able to sell off new bonds in sufficient quantity to enable them to pay off those earlier bond issues now. Think of yourself maxing out your creditcards, the bill is due and must be settled in full in a couple of weeks, and you are now desperate to find a new creditcard provider that will offer you as much new credit as you currently have outstanding elsewhere, so you can "pay off" all those debts you already had and which have come due. Yes, in this environment... good luck with that! I hope you have enough cash coming in to be able to pay the, probably significantly higher, interest rates you will need to agree to. Well, it's exactly the same for governments.

Now, as I say I am pleased for the Greeks that they have a little breathing space, because things were deteriorating too, too quickly for comfort lately. However, I cannot help but smell a rat here. What has supposedly changed so much in the space of a day or two? You think international bond investors switched that quickly from thinking "no way Jose" to "yes sir, I can boogie"? Uh-uh, me neither.

Here is my first thought on reading the BBC story linked below this evening then: I reckon some of the big European banks have borrowed a LARGE amount of cash from the European Central Bank (ECB), at a VERY good rate of interest (think in the region of 1%) so that they can buy these Greek bonds and do all of Europe's politicians a very big favour. The banks will get to enjoy the profit spread between the 1%-or-so that they pay the ECB for the cash, and the higher interest rate payments they receive from the Greek government - something in the order of 6.5%. I wouldn't be at all surprised if there was also a guarantee agreed by the ECB, so that the banks taking on these Greek bonds couldn't possibly lose if anything bad should still happen because the ECB would underwrite them as part of one of their asset swap programs.

Just a theory. It's also a theory that would explain the Euro still going down against the Dollar, in spite of what you would think would be a big confidence boost for the Euro bloc as a whole -- if there are a lot of new Euros being "printed up" for this purpose, that would signal a weakness in that currency due to basic supply-and-demand as always. I don't suppose you think anybody else that matters more than me might share a similar theory, to make that negative Euro reaction into a reality, do you?

The Council of Mortgage Lenders wouldn't tell you their product (mortgages) is set to be in less demand in future years, unless they really did think it was undeniably the case and they will later look remiss if they don't admit it now. But they did just that today.

Less mortgage lending = less demand for property.Less demand for property = lower prices for property.

Nils Blythe at the BBC is asking 'Are credit rating agencies worth the fees they command?', to which my own answer is 'probably not, but everyone is watching these ratings so market participants have to take notice of them whether they believe in fairytales or not!'.

Clearly, the impact of a downgrade on UK government debt to anything but AAA would be very bad news for British taxpayers, just as it is proving to be very bad news to Greek taxpayers lately, but never moreso than after Gordon Brown has been on a rampant public spending binge on the nation's creditcard and he has no plans to stop any time soon. I have said this before, when Stuart Cheek brought up this topic quite some while ago now (and it is proving to be my most popular blog entry by the way, lots of people are finding that blog entry via Google searching for "stuart cheek", which is interesting... to me if not to you... :->).

To summarise what I said way back when, if you don't care to visit that linked entry above: if the UK's debt rating is reduced to below AAA grade, there will have to be a flood of forced selling from fund managers, many of whom are not allowed to hold anything but AAA rated securities in their portfolios. Bigger supply = smaller price. When it comes to bonds, smaller price = higher yield (AKA "higher interest rates"). I'm certain that someone will always be willing to part with cash to buy UK bonds, whatever their rating, but at what price (and therefore at what rate of interest) is the real question.

Moving onto the question of whether the UK government will ever actually *default* on any of its debt obligations -- most assuredly not. In the UK the government's debt is issued in the local currency, the Pound. The Pound is issued by the Bank of England within the UK governments sphere of control, and there is no theoretical limit to the number that can be issued at will. This is in stark contrast to the Greek situation, where they are a member of the Euro bloc, and therefore cannot issue more Euros at will to satisfy their debts. There is, however, a cost of issuing more Pounds, in that investors will lose confidence in your currency if they notice you are overprinting the stuff. That is when hyperinflation starts, and nobody in their right mind wants that to happen, not even most of the goldbugs.

As I have previously stated, I think the Pound has entered a period of decline when measured against the US Dollar. (Most recently, here.)

To recap though, my expectation is that the Pound will rise to retest the downtrending 50 or 200 day moving average, before most likely resuming a sustained downtrend, possibly to much lower levels. Or perhaps return to the moving average lines and cut straight through them to signal yet another change of trend, only time and the charts will tell.

I have recently seen others forecasting an imminent huge rise in the gold price in US Dollars, and I have also recently seen people forecasting a large fall in the gold price in US Dollars over coming months. Both of these camps are using technical charting techniques on the US$ gold price chart to make their forecasts, and both have compelling arguments for their case.

So I figure I should crack out my own chart and scribble on it for a medium-term forecast that I can blame nobody but myself for, to see what I can come up with when I look at potential patterns on the graph and when I also take into consideration my macro view of the world around us currently. I figured anyone reading this blog is entitled to see it as well, why not? It's probably worth exactly what you're paying for it...

It seems to me that I should sum up my own macro view of the economic world around me before I head into the chart tools, because these big picture circumstances are probably the larger force that will shape outcome -- if I am going to be biased when I'm holding the crayons, it better be baised to my big picture view rather than something that I might like to see just because of what I happen to be holding today and hoping will make a chunk of change on it as a result. So here we go...

Macro view: There is massive debt in the world, debt that is going to be unpayable without something serious happening. That something serious will either be massive default of debts (serious monetary deflation) and a restart from a somewhat cleared slate at some point in the future, or massive monetary inflation and resultant currency devaluation that will make the currently-overwhelming debts seem a lot more manageable.

My current thinking is that it is likely there is a period of monetary deflation as many debts continue to be defaulted on (think property repossessions, people not being able to pay off their creditcard debts due to unemployment, etc), and this period is likely to occur in 2010, in fact likely imminently. Once people start to scream about the pain of another deflationary episode and its effect on the wider economy in general, governments will very likely restart the printing presses again (Quantitative Easing/money printing/monetary inflation/call it what you will) to magic up some currency to grease the gears of the economy and keep the voting public happy with them for a bit longer. This will devalue the currency already in circulation -- for example the case of the Pound, which has been heavily printed over the last year or so and is now worth approximately 25% less as a result.

So, to put that more succinctly then: short term monetary deflation, longer term monetary inflation.

The price of stuff you and I need or want to buy (like say food, fuel, clothing, gold, stocks and shares, bonds, pretty much anything else you might consider purchasing) is going to get lead around by these monetary forces, like a dog on a leash tracking you on a walk around the park -- it'll deviate from you at times while it goes for a sniff in the bushes and takes a leak against a tree or two, but it won't be able to get far away from you while it's on that leash because you're simply going to drag it back into line whether it likes it or not.

So, onto the technical chart then: I find Elliott Wave theory interesting myself, but this is something that is always subject to much interpretation and artistry -- it is very hard for anyone to get it right in advance, but it can be amazingly powerful if you do so. Basic support and resistance and trend lines are much easier to spot and use with some degree of accuracy, so these are also very useful tools. Fibonacci retracements are interesting, but to be honest I see them prove useless too often so I don't use them except perhaps to confirm something else I've noticed. These techniques (and many others) are all commonly used by financial chartists. If you wish to understand any of these techniques, I recommend you start with the hyperlinks in this paragraph, from where Pandora's Box will magically present itself to you. :-)

OK, let's get a chart of US$ gold price over the last year or so then, and see if we can apply any trend lines, support/resistance levels that might become relevant, and hopefully we can spot a feasible Elliott Wave pattern that might be instructive... here goes...

Hmm. So that's looks like a short term forecast from me of perhaps $1160, before a significant fall from there for a few weeks to complete a 1-2-3-4-5 Elliott Wave pattern that will form the A of a much larger A-B-C retreat. This in turn implies that to follow this there might be a sizeable price hike to form the B of that larger A-B-C, and then clearly some significant fall to complete the C of that formation.

I think I'll stay mostly out of gold for now then, and risk not making money on a possible big move coming if others are correct rather than me. It's much better than the risk of potentially losing significant amounts. This is in spite of the fact that I am a Pound-based market participant, and my feelings on the Pound are not good. The Pound gold chart is a whole other story, but it will certainly rhyme with the US$ gold story, like another dog on a different leash.

PIMCO are the biggest bond investment managers in the world. If their fund manager Bill Gross decides to buy or sell something, the market is going to get moved by it whether it's fundamentally correct or not. Yesterday he updated us on his opinion of the direction of the UK government debt "Gilt" market:

“Action is required to maintain or regain trust in sovereign credits approaching the rocks. Just last week bank of England governor Mervyn King said that it would be difficult to cut spending quickly, but that there needs to be a clear plan for doing so. Not good enough, Mr King. Don’t care. Show investors the money, not vice-versa.”

(See link at bottom of this post for CityAM article on this.)

I refer you back to my recent post on the possible fate of the Pound in 2010, here. You may be interested, as I am, to check back in on that chart to see how things are looking a couple of weeks on... the short answer is "not so great".

Now for the slightly longer answer then. The 50-day moving average (50DMA, the blue line) is now distinctly below the 200DMA (the red line), confirming this is a crossover trend change (from up to down) and not a test of support before continuing the previous trend (up again). Short term it is possible (likely) there is a reprieve in this new trend, with a return to the 50DMA blue line before continuing to fall (indicating a strong down trend is likely in coming months) or a return to the 200DMA red line before continuing to fall (indicating a down trend potentially of lesser magnititude is likely ahead). Of course, it is still entirely possible the black line will cross over both the blue and red lines and head on up into orbit with the Pound ending up at $3, who can say?

I'm sure I'll be revisiting this chart again in coming weeks to check in on progress... hopefully at that time the Pound isn't down to $1.25...

Tuesday, 2 March 2010

The Aussies are back to raising their benchmark interest rate today, from 3.75% to 4.00%. This will almost certainly give fresh impetus to the sustained rise of this currency on foreign exchange markets. Just about nobody else has an economic situation they feel could sustain any kind of fiscal tightening for now. I would say the Aussie Dollar would continue to be a buy for now, certainly compared to the likes of the Pound.

But watch the data coming out of China, because when it becomes clear their own debt bubble has burst (and it will eventually, but who can say how long they can keep it pumped?) demand for raw industrial commodities, which underpin the Aussie economy, will vapourise rapidly. The economic mojo in the land down under will then disappear, like the water in its reservoirs. Let's be careful out there, mates.

Banks in Ireland are hurting bad, after a mega property bubble blew-out and knocked them for six. Sadly, there is still much room for property prices in Ireland to fall after such a meteoric rise in the last decade, in some areas eclipsing even what was seen in London for example on a percentage basis, and the losses continue to get worse on the bank balance sheets as more and more people get into arrears before ultimately having to hand back the keys and walk away. These are people that won't be buying a property again any time soon, partly because they will carry the black mark of loan default with them so few will give them a loan anyway, but also because once bitten, twice shy.

It's a chicken and egg situation with banks and property. People can't bid up the prices of properties, residential or commercial, unless they can get cheap mortgage finance from the banks. The banks can't and won't extend cheap credit again until there is concrete evidence that property prices have hit bottom and commenced a sustainable rebound. That won't happen until people once again believe property prices only ever go up.

Even if banks start to get free'n'easy with their loans again, a LOT of people have been reminded once again that property is not a one-way bet. You can lead a horse to water, but you can't force it to drink.

One day all of the horses will be thirsty again. But not for some time, and water will by then probably be considerably cheaper and more abundant.

Gordon will tell you that he is right. It doesn't matter what he's talking about, he's just always right. However, in this instance I am talking about his policy to print the Pound into oblivion. He'll tell you it is a desirable outcome, because it makes our exports cheaper and will mean we can export our way out of economic treacle. Sadly, statistics now confirm what I have been saying all along; we do not make anything to export.

No, printing up new Pounds (Quantitative Easing in modern parlance) just reduces the value of the pound and for no benefit. The only impact of doing this is that he can continue to spend money that he doesn't have and give it to people who do not deserve it, but who will support his efforts to stay in power. Investors will continue to shun the Pound until our government stops printing money to buy its own bonds, and that can only happen when they stop trying to issue an avalanche of debt to keep paying for the unaffordable public sector and welfare system that is so clearly represented by the current massive budget deficits. That is the long and the short of it.

To graphically illustrate for you now exactly how bad this printing and economic mismanagement is for you as a holder of Pound-denominated assets (cash, bonds, shares, houses, whatever -- it's all the same), here is a side-by-side comparison of the price of gold in USDollars and Great British Pounds. You could pick any globally-priced commodity you like, gold just happens to be the best money god ever created so I choose it today for that reason. This chart is the last 3 months, at the left of both you will see the All-Time High price of gold in both of these currencies, illustrating to you that all is not good with all global fiat currencies. But they are especially bad with the Pound as you can see clearly here.

A vote for Gordon Brown's Labour party is a vote for the accellerating deterioration in the value of everything you own, and the money you earn. If you continue to vote for this, you have only yourself to blame for what will inevitably come.

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